Euro strengthens against Japanese Yen due to ECB rate hike odds
- EUR/JPY rises as expectations of a Thursday ECB rate hike support the Euro.
- The Japanese Yen received no support after May wholesale inflation rose to a three-year high of 6.3%.
- Rising factory-gate inflation solidifies market expectations for an imminent hawkish BoJ interest rate pivot.
EUR/JPY extends its gains for the third successive day, trading around 185.30 during the early European hours on Wednesday. The currency cross gains ground as the Euro (EUR) receives support from expectations that the European Central Bank (ECB) will raise rates at its June policy meeting on Thursday.
The ECB is widely expected to raise its key interest rates by 25 basis points in June, in line with its recent hawkish communication,” said Martin Wolburg, senior economist at Generali Investments.
The EUR/JPY cross appreciates as the Japanese Yen (JPY) failed to gain support from a massive acceleration in wholesale inflation. Driven by surging energy costs linked to the ongoing Middle East conflict, Japan’s Producer Price Index (PPI) jumped 6.3% year-over-year in May. This hot printing comfortably outpaced April’s upwardly revised 5.3% figure and surpassed market consensus of 5.5%, marking the fastest pace of wholesale price growth in three years.
This dramatic uptick in Japan’s factory-gate inflation has solidified market expectations for a hawkish pivot from the Bank of Japan (BoJ). With policymakers highly sensitive to the double-whammy of a sharply depreciating JPY and rising import costs, the central bank is widely expected to lift interest rates at its policy meeting next week. Traders are now closely parsing every signal from BoJ Governor Kazuo Ueda, as aggressive market speculation builds for consecutive rate hikes in September and December to rein in stubborn price pressures.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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